科磊 (KLAC) 2015 Q2 法說會逐字稿

Good afternoon, my name is Candace and I will be your conference operator today.

At this time, I would like to welcome everyone to the KLA - Tencor second-quarter fiscal year 2015 earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there be a question and answer session.

(Operator Instructions)

Thank you.

Ed Lockwood, Senior Director of Investor Relations, you may begin your conference.

Thank you.

Candace.

Good afternoon, everyone and welcome to our conference call.

Joining me on our call today are Rick Wallace, our President and Chief Executive Officer and Bren Higgins, our Chief Financial Officer.

We're here to discuss second-quarter results for the period ended December 31, 2014.

We released these results this afternoon at 1.15 PM Pacific time.

If you haven't seen the release, you can find it on our website at www.klatencor.com, or call 408-875-3000 to request a copy.

A simulcast of this call will be accessible on demand following its completion on the investor relations section of our website.

This quarter we prepared a brief slide presentation to supplemental this earnings call, which includes the GAAP to non-GAAP reconciliation of the EPS guidance and other supplemental financial information.

These slides can be found on KLA - Tencor's investor relations website.

There you'll also find a calendar of future investor events, presentations and conferences, as well as links to KLA - Tencor's SEC filings, including our annual report on Form 10K for the year ended June 30, 2014 and our subsequently filed 10-Q reports.

In those filings you'll find discussions of risk of factors that could impact our future results.

As you know, our future results are subject to risks.

Any forward-looking statements, including those we make in this call today, are subject to those risks, and KLA - Tencor cannot guarantee those forward-looking statement will come true.

Our actual results may differ significantly from those projected in our forward-looking statements.

More information regarding factors that could cause those differences is contained in the filings we make with the SEC from time to time, including our fiscal year 2014 Form 10K and our subsequently filed quarterly reports on Form10-Q and current reports on Form 8-K.

We assume no obligation and do not intend to update those forward-looking statements.

However, any updates we do provide will be broadly disseminated and available over the web.

With that, I'll turn the call over to Rick.

Thank you, Ed.

Good afternoon, everyone and thank you for joining today's call.

KLA - Tencor posted solid results that met or exceeded our expectation for the second quarter of fiscal 2015.

Our financial performance in Q2 was highlighted by gross margin and non-GAAP EPS, finishing above the range of guidance, reflecting KLA - Tencor's strong competitive positioning in the most critical process control markets, as well as a heightened focus on cost discipline across our worldwide operations.

New orders were also strong in Q2, finishing above the midpoint of the range of guidance at $865 million and up 53% compared to Q1.

The recent end market demand trends continued in the second quarter with new orders from leading edge foundry and logic for sub 20 nanometer production comprising the majority of system bookings in December, followed by 20 nanometer capacity conversions in DRAM.

As we look ahead to calendar 2015 with leading-edge device demand expected to be strong and customer profitability expected to remain at a high level, we are planning for another year of growth for the industry and for process control with semiconductor WFE investment forecasted to grow in the range of 5% to 10% in the year.

In this environment of sustained strong investment in the leading edge, the demand outlook for process control and KLA - Tencor's prospects also remain very favorable.

In the near-term, however, demand remains fluid, particularly in foundry and logic where we have recently seen orders from select customers slated for sub 20-nanometer originally expected in the March quarter pushed later in the calendar year.

We believe these delayed orders reflect yield and process stability issues associated with bringing these advanced device architectures to market.

Demand from memory customers remains robust and in fact, we achieved our highest quarterly bookings level for memory in Q2.

Memory demand is expected to remain strong in calendar 2015 with 20-nanometer conversions in DRAM making up the majority of memory customer activity.

NAND products in calendar 2015 are expected to be largely focused on planer architectures with expanded investment in 3-D planned for later in the year.

As always, demand growth in our business is driven by the strong pace of investment in next generation semiconductor device technologies by the market leaders in logic, foundry and memory.

Process control plays a critical role in helping these customers solve the mission-critical production problems associated with managing yields in leading edge manufacturing environment.

As the market leader in process control, KLA - Tencor continues to benefit from these evermore complex and costly yield challenges.

So, from our perspective, 2015 promises to be an exciting year for KLA - Tencor.

Looking beyond these near-term market factors, we are well-positioned in key markets with innovative products to execute our strategies for growth in market leadership and to deliver strong returns to our stockholders.

Turning now to guidance for the third quarter of fiscal year 2015, new orders in March are expected to be in the range of $500 million to $700 million.

Our current forecast shows orders the first half of calendar 2015 on par with levels achieved in the second half of 2014.

Revenue guidance for Q3 is in the range of $685 million to $765 million and non-GAAP earnings per share in the range of $0.63 to $0.87 per share for the quarter.

And with that, I'll turn the call over to Bren for his commentary on the quarter before returning for Q&A.

Bren?

Thanks, Rick, and good afternoon.

Revenue for Q2 was in the upper half of the range of guidance at $676 million and non-GAAP earnings per share finished above the guided range for the quarter at $0.68, driven by stronger than expected gross margins in the quarter and good execution of cost management.

Fully diluted GAAP earnings per share in Q2 was $0.12.

The GAAP earnings per share in Q2 included $0.53 of charges related to leveraged recapitalization transaction which we completed in Q2 and $0.03 of restructuring and acquisition related charges net of income tax effect on these adjustments.

My comments on the quarter will be focused on the non-GAAP results, which exclude the adjustments.

A detailed reconciliation of GAAP to non-GAAP earnings per share can be found the press release and supplemental materials posted on our website prior to this earnings call.

New orders in Q2 were $865 million, above the midpoint of guidance of $700 million to $900 million for the quarter.

We continue to experience a high degree of variability in order timing and delivery date commitments from our customers.

We believe this is the new normal for our industry with our top five customers accounting for approximately 75% of demand today and often with one or two customers accounting for a significant portion of order and shipping volume in the given quarter.

With each customer having their own unique timeline for excecuting their technology investment and capacity expansion plans and with shorter product delivery lead times becoming normal in our industry, forecasting accuracy of bookings within a 12 week window has clearly become even more of a challenge.

With that, though December orders and shipments were strong, the near-term shift in customer demand requirements that Rick mentioned have resulted in a certain shipments which were originally slated for the margin June quarters moving into the second half of calendar 2015.

We see this as largely a timing issue, and our optimism for calendar 2015 to be a growth year for KLA - Tencor 10 core is high.

Our internal shipments forecast for calendar 2015 is consistent with business levels that would support revenue growth for KLA - Tencor, in line with the overall history growth rates and what is expected to be another year of strong CapEx investment, with shipment volumes roughly balanced across the first and second half of the year.

Regarding customer segment commentary for the second quarter, combined foundry and logic customer demand was 56% of new orders in Q2 and slightly below our expeditions for the quarter due to some marginal weakness at the leading edge.

As I mentioned, we believe the near-term volatility in foundry and logic is largely a timing issue and a function of a variety of factors, including customer concentration and yield issues as well as shifting capacity requirements at the leading edge for 14-nanometer and 16-nanometer and the timing of early development activity for 10-nanometer.

Memory bookings were a record in Q2, finishing at 44% of new system orders in the period with upside from DRAM.

We expect memory demand as a percent of total system orders in calendar year 2015 to be on par with our calendar 2014 results with investment focused on technology upgrades in DRAM and on capacity additions of planar device architectures in NAND and 3-D NAND.

Investment by our customers at 20-nanometer and below constituted roughly 69% of the orders we received in the December quarter.

Turning now to the distribution of orders by product group, wafer inspection was approximately 47%, reticle inspection was 11%, metrology was approximately 20%, service was 20%, storage, high-brightness LED and other non-semi was approximately 2%.

Total shipments in Q2 were $766 million, up 40% sequentially from September.

We expect shipping growth again in Q3 to a midpoint of approximately $785 million in the quarter.

Given current shipment backlog, we expect shipment levels to remain at a high level with first year calendar 2015 shipments expected to grow compared with the second half 2014.

In total, we ended the year with just over $1.3 billion of total backlog, comprised of $1.1 billion of shipment backlog, or orders that have not shipped to customers and expect to ship over the next six to nine months.

Total backlog includes $262 million of revenue backlog, or products that have been shipped and invoiced but have not yet been accepted by customers.

Turning to the income statement, revenue for the quarter was $676 million, above the midpoint of the guided range and up 5% compared with Q1.

Gross margin was a 58.5%, an increase of nearly 3% from September and significantly above the guided range for the quarter.

Our gross margin significantly exceeded guidance for the quarter due to a favorable mix of products and services and better than expected manufacturing deficiencies due to output levels and favorable foreign exchange impact in our offshore factories.

We expect gross margin to be in a range of 56.5% to 57.7% in the March quarter as the benefit of higher revenue volume is offset by a less favorable product mix compared to the December quarter.

The shipment dynamics related to today's operating environment have also added additional volatility to our gross margins.

Over time our gross margin performance should continue to reflect our differentiated business model, which is fueled by 60% to 70% incremental gross margins.

Operating expenses were $231 million, down from $240 million in Q1 and below the guided range of $236 million to $238 million for the quarter as we saw the benefit of a heightened focus on cost management.

Over the past few years we have made critical investments in R&D and customer application support, advancing the product roadmap for flagship products such as broadband plasma and laser scattering wafer inspection technologies and the archer platform in overlay metrology.

We've also made investments in new opportunities for growth such as the 5D patterning control solution.

We believe there are additional opportunities to continue to meet customer requirements and to sustain our market leadership while driving better cost efficiencies throughout our organization.

Looking ahead, we are modeling operating expenses of approximately $227 million to $229 million in the March quarter and expect operating expense levels to decline over the course of the calendar year to about $220 million per quarter.

Other income and expense for the quarter was a net expense of $29 million, reflecting the impact of the new debt on the balance sheet resulting from our leveraged recapitalization.

We expect OIE to be a net expense in March of approximately $30 million.

The tax rate was 16.4% in Q2, lower than the 23% revised guidance rate for the December quarter, principally driven by the reinstatement of the R&D tax credit in the US.

Going forward, you should continue to use a long-term planning rate of 22% for modeling purposes.

At the 22% guided tax rate, earnings per share would have been $0.64 in Q2.

Net income was $113 million, or $0.68 per fully diluted share.

Turning to balance sheet, cash and investments ended the quarter at $2.4 billion, a decrease of $576 million compared with September.

This reflects the impact of the leverage recapitalization transaction we completed in the December quarter.

In conjunction with this transaction, we issued an aggregate amount of $2.5 billion of senior notes with various maturities with a blended interest rate of 4.28%.

We also entered into $1.2 5 billion five-year senior unsecured revolving credit and term loan facility.

This credit facility consists of $750 million of amortizing term loans and commitments for an unfunded revolving credit facility of $500 million.

The interest rate on the $750 million credit facility is 1.49% based on current rates.

With proceeds from this leveraged recapitalization, we paid a special cash dividend of $16.50 per share for a total amount of $2.76 billion.

Concurrent with our leveraged recapitalization, we also announced that the board of directors has authorized an expansion of our existing $1 billion share repurchase authorization announced in July by an additional $250 million.

In the quarter, was repurchased 2.1 million shares of stock at an average price of $69.94.

As of December 31, we had approximately 14.8 million shares available for repurchase under our current authorization.

We plan to execute these share repurchases over the next 12 to 18 months.

In addition to the $16.50 special cash dividend in December, we paid a regular dividend of $82 million, or $0.50 per share in the quarter.

Cash from operations was $11 million in the quarter, down $24 million sequentially, largely due to the higher accounts receivable associated with the ramp in shipments in the quarter and monthly linearity.

And lastly, fully diluted shares ended the quarter at 165 million.

In conclusion, to reiterate, our guidance for the March quarter is new orders are expected to be in the range of $500 million to $700 million, revenue is expected in the range of $685 million to $765 million with non-GAAP earnings per share in the range of $0.63 to $0.87 per share.

This concludes our remarks on the quarter.

I will now turn the call back over to Ed to begin the Q&A.

Thank you, Bren.

At this point, we would like to open the call to questions.

We once again request that you limit yourself to one question and one follow-up given the limited time we have for today's call.

Please feel free to requeue for your follow-up questions, and we will do our best to give everyone a chance for further questions as time permits.

Candace?

(Operator Instructions)

Timothy M. Arcuri, Cowen and Company.

Bren, your commentary on the first calendar half of the year, did I hear that right in that it suggests that the June orders are going to up like 35%, 40% sequentially?

And I guess, does that assume that the pushouts on FinFET, that they come in June, or that they're more additive to that during the back half of the year?

And then I had a follow-up.

Thanks.

Tim, it's a good question.

When we looked at it, we saw a similar profile to the second half of calendar 2014 with the weaker first quarter with some bounce back into the June quarter.

It looks, as we size the six month period, it looks pretty similar to us.

Ands I said in the prepared remarks, I think that the 12 week window dynamic is becoming a more challenging dynamic for us to forecast with the customer concentration, size of orders and so on.

As we look at the six month window, it looks like it's roughly the same size.

And then just on margins, Bren.

At this revenue level, margins are, they're a good 150 basis points below.

I'm just looking at March, the guidance.

They're a good 150 basis points below where -- if you average out where they've been the past couple years at that particular revenue level, it seems like you're giving up of about 150 basis points on margins.

What exactly is happening there with of the mix, and will you get that back in June?

The mix factors are -- for the same reasons we talked about, with the shipment plans, as you ship tools to customers and you're shipping more to individual customers, you're revenging tools faster.

In some ways, your margin is impacted by the mix of products you're shipping to a greater degree than what we have seen in the past.

Clearly, margins were extremely strong in Q2 for the reasons we talked about And there are some correction of that in the March quarter.

I think as you're monthly out our business at this $3 billion-ish run rate, I expect to see gross margins somewhere between 57% to 58%.

There are, obviously, the mix dynamics that will play out in any given quarter, but that's how we're modeling it today.

And I think the other thing to keep in mind is the growth of our -- Tim, I think one other thing to keep in mind is the growth of our service business, while accretive at the operating margin level, is dilutive to our gross margins.

There are no -- we don't -- the way we do our accounting, there's no operating expenses there.

We believe it's -- there's an impact, a dilutive impact to gross margins from that dynamic and services in the low 20 percentile of our revenue mix.

Farhan Ahmad, Credit Suisse.

Can you briefly talk about the pushouts that you saw?

Are they coming more from the leading edge 28 nanometer -- sorry, sub 20 nanometer production as you mentioned?

Is of coming from primarily in US region, or is it coming from overseas, some foundries?

Can you just briefly describe which regions you see the pushouts from?

We came in, obviously, stronger at the -- versus the midpoint in Q2, so certainly, that impacted our views in Q3 with some pull-ins in the Q2.

But in terms of Q3 versus what we thought, it's really a mixed bag across foundry and logic.

It's leading edge, but also some of the trailing edge business that we been forecasting for some time and has been a bit elusive.

And I think that's dependent ultimately on some competitive dynamics in terms of second source strategies and so on I would say it's across the board in terms of what we saw in Q3.

And as I said earlier, some of it, we think, comes back in Q4

And then second question I have is just talking about your next six months forecast, you're talking of revenues been flattish, half-and-half.

If I look at that the EBITDA level that you had in second half of calendar year, it's about $330 million.

Assuming that your profitability and revenues are similar, you're looking at like -- EBITDA levels of about $626 million, $630 million.

Do think that there is some risk to the debt to EBITDA covenants as you look out for a year or two?

Your EBITDA profile seems pretty low compared to what it was a year ago in terms of like, if I look at the six months period from now in the past six months and compared that to the previous one year, it's a down quite a bit.

Our commentary on the first half was bookings related, not revenue.

I expect the revenue to be higher than bookings.

I don't want to guide June, obviously, but I do think we'll see sequential growth into the June quarter.

I don't have been math in front of me on EBITDA, but as I've looked at it relative to the covenants I have with my bank debt, we feel pretty comfortable with a level we have relative to what were our expeditions are for the business going forward.

I don't have any concerns based on what we see today.

Obviously, with the backlog position we have and our expeditions for shipments into this quarter, June should set up for a sequential increase in improving operating profitability.

Krish Sankar, Bank of America, Merrill Lynch.

Two of them, first one Rick or Bren.

It looks like you're running at a $600 million run rate for bookings in March and $800 million or so in June.

What does the composition of those orders look like in March and June in terms of memory and foundry?

And I had a follow-up.

We're not guiding the June quarter, but for March, March looks to be pretty foundry centric, so 70% foundry and memory is 19%, logic 11%.

And NAND as a percent of the total memory mix is about 31%.

And then a second question is, one of the things I noticed, but December and March and your guidance on OpEx is that the OpEx seems to be coming up pretty strongly, seems like -- just trying to find out, is this, A, a function of you guys responding much faster, more aggressive on the OpEx side, given gross margin of pricing might be under pressure?

Or is it a function of the fact that there are some projects that don't need to be executed anymore, like 450 or something else like that?

You said coming up?

Did you mean OpEx coming down?

OpEx coming down, yes.

Krish, I think that's right.

If you look at the last couple years, we've had sustained investment in a number of key platforms in the program.

Obviously, we're investing in 450.

Investing at a slight level, but investing in DUV in addition to some growth opportunities like our 5D solution.

Customer support, another area.

We've invested according to the roadmap, we think we're in a positron now relative to our roadmaps and our competitive position that we think that there are opportunities for us to start to scale this down somewhat.

And so we saw that momentum play out in the December quarter, we think it continues in March and progresses through the year.

We're also doing some things underneath the surface in terms of how we think about our sustaining engineering, how do we use offshore engineering resources more efficiently and so on, that we think we can drive the operating run rate down in the 220 range as we move through the calendar year.

CJ Muse, Evercore

Good afternoon, thank you for taking my question.

I was hoping to go back to your comments on customer concentration.

Because if we go back in time, you guys had great ability to manage to a six month backlog, give or take and clearly, there was customer concentration issues then as well.

Just curious it movement of market share from one player to another, is it enhanced customer concentration?

What's driving the change in your business model?

I think it's really our customers.

Given the lead time that they have in the markets that they are supporting, I think their lead times have come in, and I think we've seen that same pressure pushed back on us.

We have had to change our business somewhat in terms of our ability to be flexible and it respond.

But in a lot of these cases, we'll have these conversations where we will ask for more lead time, and our customers will push back, given the dynamics that they are facing, so there is less predictability.

We have seen it for a while, and I think it's just a change versus where we were in the past.

I think it's more the end markets, and I think the concentration, we have very sizable orders, sizable shipments that are going to ship out.

And as a customer changes the plan, it has a dramatic impact, obviously on a given quarter's shipment.

Our shipments tend to be pretty close to the ranges that we're guiding, but it's more of a challenge today, and certainly impacts not just the overall shipment level, which has an impact on revenue, but also the gross margin, given the mix of products that you're shipping.

I also think, if you think about consolidation, one way I think about is, I look at consolidation of our customers' customer in terms of their influence on the spend.

So, especially in the foundries space, their actions actually are often not really clear until very late to our foundry customers.

And that's part of the dynamic of the movement.

That's why we don't get more visibility, I think, from our foundry customers.

As a follow-up, (inaudible), one was, as we think about the uplift in your account receivables, and then the second one is you've shown really good growth on the service side, will that continue, and how should we think about service spares as well as upgrades as part of that mix?

I will take the service inside.

I do think we will continue to see growth out of service.

One of the things service is benefiting from, on the -- one way I think about it, the Internet of things isn't really driving a lot of front end WFE spend, but it is driving the longevity of a lot of these fabs, which is good for our service business.

I think part of what is happening is as some of these fabs- run longer and get more devices, we're seeing the extension of the life of the tools that are being serviced, and that's part of the underlying driver for our service business, which is great.

And I will let Bren handle the accounting part.

On the day sales outstanding, it was -- on revenue, about 85 days, so a significant uptick there.

And that was really a function of the monthly shipment linearity.

We shipped a number of tools in December and in last part of December, so the cash collection will happen in the first quarter on those shipments.

And so I'm expecting reversion back to normal 70ish or DSO levels, plus or minus a few days.

And it will drive operating cash flow probably up in the $250 million to $300 million range as we move into March, based on what we're expecting to ship today and the timing of shipments, so.

Thank you.

Harlan Sur, JPMorgan.

Good afternoon, this is Bill Peterson calling for Harlan.

I was hoping you could share a little more color on this push out, is a basically just one customer, or is it broader participation?

And I guess what gives you the confidence that these will materialize for the second half of the calendar year, what do you base the confidence on?

If you look back, even -- some of the stuff that we pushed out even was in December, and we were having for high-level conversations with customers that felt like they had pretty strong commitments from their customers to move forward, and they were in the process of allocating space and slots to support their ramp.

And then very late in the day that got pushed, and so those -- some of those things even pushed outside the March and June window and into the second half.

When we look at the overall dynamics, you say that we are in great shape share wise, the adoption seems to be working.

What happens is these guys slide as the dynamics behind them are moving.

And we see it both, as Bren mentioned to prior question, both at the leading edge as we're seeing some that logic, but also some of the not leading edge in the foundry space we're seeing movement.

You just go back to, what are your assumptions about WFE for the year and what do you really think of the foundry spend.

And our view is if in fact the WFE numbers work out, then we will see them in the second half.

But until -- as you know, until the orders are placed, it's very hard to know if they will.

But if you go back to our under riding assumption is WFE up 5% to 10% this year and the mix largely intact with what it was last year, we feel pretty good about how the year is going to play out.

The uncertainty has increased as of volatility due to concentration.

Jim Covello, Goldman Sachs.

Hi, this is Chelsea Jurman on behalf of Jim, thanks for taking the question.

Can you talk about your plans for paying down or refinancing the new debt and whether or not to 2 to 2.5 times is the right leverage level to be thinking about?

Thanks.

We just borrowed the money, so we're not planing to refinance, we're pretty happy with the structure of the debt that I laid out in the prepared remarks.

Our goal, our long-term target is 2 to 2.5 times, we think that makes sense for a business with our characteristics.

We went above that in this case, as I talked about in the last call.

Given the attractive lending environment, but also the -- what we expect to be a healthy CapEx environment over the next couple of years.

We structured the debt in a way that we can pay it down, and we will pay it down with the term loan piece, which is pre-payable with a lot of flexibility in how we do that.

And so we'll do that over the next couple of years, working down to our long-term target.

That's how we're thinking about it.

As a follow-up, you mentioned on the last call that you're expecting multiple layers to be on FinFET by the end of 2015.

Have you -- are you still expecting multiple players, or is that more of a one player?

In the foundry?

Yes, in foundry.

I think you'll see multiple players, I think that's still our expectation.

But to the points earlier, we're seeing a much more measured ramp of capacity for FinFET.

I think the leader is comfortable with their position and the other players are working quickly to try to catch up.

I think the competitive dynamics on that front will ultimately drive how much capacity gets added over the course of the year.

We think that is what is driving some of it in the second half and -- but ultimately, I think you end up with multiple players with the capability.

Great, thanks.

Edwin Mok, Needham & Company.

First one, did I hear correctly, that you said that you would start your shipment in the memory space to be roughly the same this year or flat to last calendar year?

And if that is the case, that would imply a very strong growth in foundry potentially in your second half.

Is of how we should think about how the shipment trajectory for your business?

We said orders, the order mix as a percent of the total, we expect it to be roughly similar, in the low 30th percentile, that was memory in calendar 2015 versus calendar 2014.

There could be some timing issues, but generally that should translate mostly to shipments in a similar mix.

But obviously, the timing issues and lead time can have an effect on that.

For us, from a pricing perspective, product mix perspective and so on, there's not a lot of difference in terms of what we ship at memory and foundry.

So, it doesn't really have an impact necessarily on the revenue levels or the margin profile of the various segments, so it's all pretty consistent across the segments for us.

On this foundry pushout, maybe just some clarification there.

You mentioned there's some pushout, not just in leading edge, but also trailing edge orders, right?

But then you also mentioned that your quarter came in a little stronger than you expected and there was some pooling on order.

I'm just trying to understand the dynamics.

Are these pushed out -- are you expecting a lot of these pushouts to be captured in the June quarter, or -- which your guide for higher order in June quarter, but some of that expect to the second half?

In terms of shipping of these orders, given pushout, should expect a shipment to come back, and is that going to have, or is it more related to the 16?

We had a nice bounce back in foundry, from Taiwan specifically, in the end of December quarter.

That was encouraging to see, but foundry was a weaker than we expected going into the quarter.

Most of the strength came from a much stronger memory mix of the business than we were modeling.

As we look at the next quarter or so -- couple quarters, as we said earlier, it's a mixed bag.

It's 20 nanometer and below, it's also some 28 nanometer business, and obviously there's also some 10 nanometer early activity that's part of that as well.

It's a collection of customers.

And not huge amounts of dollars, but in the aggregate, obviously had an impact on what are planning for the first half of the year.

Patrick J. Ho, Stifel, Nicolaus & Co.

Maybe a big picture question for Rick in terms of memory process control intensity.

If I recall, at your analyst day last July, you mentioned that you expect to see process control intensity rise for the memory space.

Looking at the DRAM spending that we're seeing today in the conversions at 20 nanometers, one, are you seeing the?

And secondly, is there a bias towards inspection or metrology, particularly as you see more multiple patterning steps at 20 nanometers?

Great question.

Pretty much tracking the way we laid it out at SEMICON in terms of memory.

The one caveat I would say is for DRAM it is.

And back to the mix, it looks like a historical mix.

You do get overlay, to your point, you get some strength there, but you also have advanced [EPEC] inspection to find some of these smaller nodes as you're pushing DRAM technology.

So, DRAM look very much like we said.

As we said then and even said in last call, it's too early to tell on 3-D flash because there just hasn't been enough of it and it's still early days on that.

Whether or not that plays out to be at the intensity that we laid out, time will tell.

And given the latest -- the view that there's going to be more pushout of 3-D from what was expected, even at SEMICON, I think that it's be -- the rest of the calendar year will really have validated that model.

But I think for DRAM, it has been tracking the way we assumed and the historical mix looks pretty similar between metrology and inspection.

Great, and as my follow-up question, maybe also for you, Rick, in terms of the foundry process control intensity, you guys a saw a big pickup when 28 nanometers was rolling out, given the yield challenges.

The two-part question there is one, how come you haven't seen it yet with the 16 and 14, given the challenges there?

And secondly, do you think you'll get that kind of incremental step up that you saw at 28?

Yes, that's a great question.

I think the challenges associated with yield right now, what we're seeing at sub 20, are not necessarily things that inspection and measurement can address.

I think it is more a function of some of the, just process integration.

And while we could be helpful in diagnosing that, that's very different than addressing the manufacturing ramp, so we're still early days on that.

Will we see it?

Again, we are too early to say whether that will be validated in the roll out because people aren't really far enough along in that development to know.

But our expedition, the signs are good.

There are also some questions about utilization of existing facilities.

For example, will customers roll what is 20 nanometer capability to 16 and then what happens to the intensity in that scenario.

And again, it's too early to know that.

Mehdi Hosseini, Susquehanna Financial Group.

Rick, it seems like you have a pretty good confidence with opportunities this year.

It's just that the quarterly booking and shipments are lumpy, something that we went through last year.

Given your confidence and also the lumpiness, why not provide us with kind of a year end guide so that we could avoid debating whether June will be up 30% or flat and put the forecast on your longer-term opportunities rather than trying to time the specific orders that have such a big variance, given the customer concentration?

Thank you.

Mehdi, I will go ahead and start.

We tried to provide a little bit more color and broader windows, six month windows, about what we're seeing in the business, over the last few quarters, and I think that's important.

We've also tried to give you some insight into where we're based on where the industry is projecting to be, where we think we'll end up relative to that.

For example, when I talked about calendar 2015, I think in Rick's prepared remarks, we thought give, the dynamics of the mix of business across foundry logic versus memory, that we would expect if the industry was up 5% to 10%, we ought to perform somewhere in line with the market.

We think that obviously the process control intensities of the two segments or three segments are different.

And with memory as a higher percentage, that does impact our ability to outperform industry.

As we look at it this year with roughly the same mix of business, we see a market perform year, and I think that translates from a 12 perspective into a $3 billion to $3.1 billion type performance level at the $33 billion or $34 billion WFE level, which is that plus 5 to plus 10 range.

We're trying to do it all.

But at the same time, we feel like we don't want to be less transparent in the process.

We think the quarterly bookings are less relevant to our business today, given concentration and given that the industry is not as a cyclical as it was in the past.

But it is something we've always provided and we will continue to provide it.

We've put a broader range on it, and we'll do the best we can and then try to bridge it back to what happened versus what we thought would happen.

And Mehdi, to your point, I know you've made this point before, I don't disagree with the thought process in terms of the lumpiness and how much help is it really.

But on the other hand, as Bren said, we're reluctant to remove something given that the general view of the desire to have transparency.

But it is something we debate from time to time.

I could tell you, it is not exactly how we run the business.

When we go back and think about, how do we run the business, how do we size of the business and do we make investments, it's not based on the quarterly numbers, it's based on what we view as trends.

And even then, it's not even annualized, it's on a longer-term basis than that.

But your point is once again made.

And then my follow-up has to do EUV.

When you presented at the competitor conference in December, you highlighted some of the intimate conversation you are having with some of your customer.

The big foundry in Taiwan is proceeding forward.

What are you going to come down to?

It seems like you are waiting for investment, the largest customer is proceeding forward.

Is there a timeline here, or are you just not going to proceed forward even if your largest customer wants to move forward?

I think that the way it stands today, that any production done with EUV before 2020 is going to be done without Actinic Reticle Inspection.

We are not too late to make any insertion point, and that's based on the fact that there is still a lot of debate by our customers about relative trade-off between the cost of us developing that technology and their confidence of its need in production.

I'm not saying EUV won't go into production before 2020 because we don't know that, but I can tell you it won't go into production before 2020 with Actinic Reticle Inspection.

Either it won't go into production, or they'll have to figure out how to do it without it.

Mahesh Sanganeria, RBC Capital Markets.

I want to get one more clarification on the foundry pushout.

ASML reported a pretty good booking, and I think that primarily came from Taiwan.

And I think you commented that your booking had a pretty good Taiwan component.

My guess is that the pushout that you are seeing is not from Taiwan and other places?

As I said earlier, I think it's a mixed group and comes from a number of regions and at a number of nodes.

I think that given lead time, I think that certainly customers tend to get in the queue with litho sooner.

I don't know exactly what is MOSFET or how they've positioned it.

As we look at it today and to Rick's point earlier, there is some fluidity to these orders certainly at 28 nanometer.

And so they're moving around a little bit and so the timing is uncertain and we'll just have to see how it plays out.

Can you comment on what is the -- what could be the -- we know that for 2016 the driver is the yield issues and customers giving allocation to foundries, that's a big driver for 16 nanometer, 20 nanometer fluidity.

What, in your opinion, is driving the changes at mature technologies?

I think it's a similar dynamic, it's just not happening so much with the leading edge foundries.

I think there is significant competition for 28 nanometer foundry capacity, and we are seeing movement among those players as a try to win that business.

Similar thing, but just not with this exact same players.

Weston Twigg, Pacific Crest Securities.

Just wondering real quick on the reticle inspection business, which I know is a good high margin business, but that you've mentioned is somewhat saturated I was wondering if there is an opportunity for that to pick up a bit more as customers move to multi-patterning schemes, or do you think the install base is generally pretty sufficient at this point?

It's a great question, Wes, and I think that the -- we don't know the answer yet.

I think that it's not as much about multi-patterning per se as it is sub 20 nanometer technology.

The multi-patterning above 20 I think is pretty well positioned.

The question will be the sub 20, are there new kind of inspection modes require new algorithms, new developments, as people try to figure out exactly how to tune those reticles to support sub 20.

And there are some indications that will create some boost in demand.

But again, it's relatively early in that and we don't really see it.

So, what mostly is happening now, we did have some good reticle business last quarter, but mostly with happening is in the fab, and that's -- those tools are not fully -- those are not as complete tools.

So, you have a tool that's targeted at fab line that's a different kind of tool than what we sell to the [math] shop.

But we will wait and see on that, I think that there's a good possibility that will see some increase in demand.

I would' t forecast that in the very near term though; I think that's a longer-term thing.

And just real quickly, wondering with the new cash balance, can you give us just an update on what's off shore versus on shore?

It's about -- about $1 billion of it's on shore.

$2.4 billion on shore.

Perfect, thank you very much.

Apologise, I'm jumping on a little bit late here.

Rick, AS&L said the other day that every single memory maker is increasing capacity, and I know you indicated that visibility into 3-D NAND is a little bit limited today.

But I was wondering on DRAM, how do you see capacity playing out here in the first half?

Is it increasing, and how would you describe the pace?

I think memory is setting up to have a good year again in 2015.

We have seen strength in our memory business.

As we commented on the call, the December quarter was our best memory quarter, and we see that continuing.

And it is mostly in DRAM, and we think for the year it looks that way with the 3-D NAND being later in the year.

I think it's true and I think our adoption has improved, but again, it's a lower level than foundry.

So, from our standpoint, a mix shift toward memory doesn't increase our available market.

And Bren, just on the special dividend, I think it was a little controversial at the time but in retrospect, it looks like it was a very good decision.

And I'm curious how you're thinking about this going forward, have you considered at all the idea of doing a smaller, but perhaps more frequent special dividend based on the performance of the business?

Just back up.

Our process is that as we evaluate the Company's strategic plan and we look at not only our cash reserves, but also the debt capacity that we have, we go through that process and we think about the alternatives and how we invest in operational, M&A considerations or shareholder return considerations.

That's a regular process for us.

Clearly, the shareholder return options are viable options andI think that in terms of value creation, the other options are juxtaposed against that.

Clearly, we have a long-term target and in terms of leverage levels, we think it makes sense.

And as we deleverage the debt and we see the growth in EBITDA in our business we'll -- to the extent that that affords a positioned for us to run through that process and consider it again, it's a possibility.

But we'll run through the process and make the right call based on what we think is in the best interest of the shareholders long-term.

Sundeep Bajikar, Jefferies

Thanks for taking my question, two questions on foundry.

First, what level of sub 20 nanometer foundry capacity do you currently expect to see get built or converted overall?

And how much of this did you actually see get build in the December quarter, if at all?

We just -- I think some of the 20 nanometer conversion will be largely determined by what happens with end markets and whether as the major customer there, as they migrate away from 20, does that capacity get consumed by other fabless customers?

I think that's the wild card.

I think of 14, 16 capacity is really just starting to get added.

And so we'll see that capacity get added over the next few quarters or so through this calendar year with FinFET designs coming out of the foundry probably sometime in the fourth quarter of the calendar year, at least that's our best estimate at this point.

Just as a follow-up, what's typically the lead time in foundry?

I know you said you don't have a lot of visibility, but if you can provide a perspective on how much of the lead time might have shrunk, I think that would be hopeful.

It varies by customer across products, but I think we're generally -- if you look at our backlog with most customers, we're usually -- it's about four months from the time that we get orders to the time we ship the tools.

It varies, but I think that's a reasonable way to think about it.

Sidney Ho, Deutsche Bank

I just what to make sure that I hear, in your prepared remarks you mentioned the WFE markets will grow 5% to 10%, but you spent your mix to be similar to 2014, I don't know if it's orders or revenue.

But at the same time, you also expect to grow in line with the WFE market.

If I look back at 2014, I think the mix was Can you help me reconcile how you're going to be able to grow in line with the WFE market?

Is there some customer specific, is there some intensity increase, that kind of thing?

Thanks.

Think of it this way, if the mix stays the same year on year, then we shouldn't see under the market gross less than the overall market, right?

What happened in 2014 is the mix swung to memory.

Does that make sense?

Yes.

Therefore, it drove down the overall potential market for process control because memory intensity is lower.

If year on year the mix is the same as last year, then our compare is last year and then we ought to be able to grow with the market for the space, does that make sense?

Yes, I guess the point is, you said mix didn't turn more unfavorable.

It stays where it was as opposed to shifting.

What happened in 2014 versus 2013 is it increased for memory, and that drove down available market for process control, right?

If 2015 ends up looking like 2014, then that's your compare.

And of course we hope to outgrow it, but when we are looking across the board.

Now, if memory is actually a larger percent, if that mix increases, then we will be up against that headwind and we'll have to grow either through market share or driving additional adoption.

That makes sense.

My follow-up question is on foundry.

I think there are many questions in foundries, but it seems like there should be a big push for foundries in the first half and I know you talked about some pushouts and whatnot.

Is there enough visibility right now to look at what you'd think first half versus second half is?

I think overall, we can do the whole year and we look out, that goes back to WFE for the year.

And as things slosh around in there, to Bren's point, it can impact if it goes late enough in the year, our ability to revenue it because of the shipments in revenue.

But the dynamic right now is shaping up.

We still think the year looks consistent with an up 5% to 10%, but with some moving parts, and we are not certain how they are going to play out.

But we don't give guidance beyond the next quarter other than commentary on our perspective on the year.

(Operator Instructions)

We have further questions at this time, I'll turn the call back to Mr. Lockwood for closing remarks.

Thank you, Candace.

That concludes our call for today.

Thank you all for joining, and we look for to seeing you later on in this quarter.

This concludes today's conference call, you may now disconnect.